- We talked to Blair Fleming, head of RBC Capital Markets US, about dealmaking and the Canadian bank’s US growth plans.
- Fleming on growth plans: “We have a very deliberate and straightforward strategy to grow our investment bank here in the US.”
- Fleming on hiring: “We will continue to add the right people to the platform. Things are still in play and we will keep going.”
Blair Fleming is a man with many job titles.
He’s head of RBC Capital Markets, US, and Head of US Investment Banking for the Canadian bank. He’s also CEO of RBC USA Holdco Corporation, RBC’s US intermediate holding company. It’s so many job titles that he has two different business cards.
He oversees a business that ranked tenth in investment banking fees in the US in 2016, according to data provider Dealogic, with $US979 million in fees. The bank had a 2.8% market share in the US, according to Dealogic, up 0.5 percentage points. It posted big gains in US debt capital markets revenue, US syndicated loan revenue, and global financial sponsor revenue.
It’s a striking change for a bank that it has roots north of the border stretching back to 1864, before the confederation of Canada in 1867. It started out offering credit to merchants in Halifax, winning a government charter five years later in 1869. But while RBC stands for Royal Bank of Canada, Fleming insists that the bank is now “American as you can get” when it comes to investment banking.
We talked to Fleming about dealmaking, hiring and winning business with Facebook.
Matt Turner: How’s business?
Blair Fleming: 2017 has definitely been off to a better start than 2016. If you look at what’s driving business now, the election helped. You’re seeing a little bit of caution about tax reform, and so that seems to be dampening things a bit, but overall if you look at the origination business, clients are engaged in a lot more activity. M&A is up. Debt markets are strong. There is an equity market. You are starting to see a fair number of IPOs get priced.
Turner: US M&A revenue hit a record high in the first quarter. What’s going on there? Valuations seem pretty rich.
Fleming: While I think it’s pretty robust and optimistic, there is an element of caution given how expensive things are. If you look at banks for example, they took off after November and I think people were thinking, ‘Well that’s going to mean there’s going be a lot of M&A.’ But how does M&A happen when things are so expensive? We have been waiting for bank M&As since the financial crisis and there always seems to be something in the way.
Turner: How does business break down for you across sectors? I know historically RBC was strong in energy, in commodities, in industrials, in infrastructure, but you’ve built out from there.
Fleming: We are diversified and that is deliberate. We don’t have any industry that accounts for more than 12% to 15% of revenues. The big ones are FIG, consumer, industrials, healthcare, energy and communications, media and technology. We are in basically every industry. We’ve diversified deliberately, because, you know, seven years ago we were a 25% energy shop. That would have been a problem last year.
We’ve got a big energy team that is Houston-based, about 300 people, and that is across mid-stream services, E&P, we’ve got a team doing sell-side, reserve based, M&A. It’s a big team, but it’s no more than 15% of our revenue, which as an asset manager is what you want, right?
Healthcare is a big part of the economy. Communications, media and technology is a huge part of the economy, and capital intensive on the telecom side. We punch above our weight in TMT. Consumer retail is global and important. Retail is obviously challenging.
We deliberately built them out to make sure that we’ve got a diversified business, because when I set my budgets every year — or when my budgets are set — it is pretty difficult to prognosticate with 100% accuracy as to which industries it is going to come from. Our product diversification has come along nicely too.
Leveraged finance is about 40% of our revenue. That’s comparable with the street. Debt capital markets and investment grade would be about 10% of revenue. That’s street. M&A is 23, 24%. That is a little bit under index but coming along nicely. And then equities is about 23 to 24%, which is street. So I think we’ve done a decent job at trying to make sure our industry footprint is diversified. And that the revenue is diversified across our products too.
And you try to make sure you get the right bankers to help drive that and to make sure you’ve got the right research platform. You know research is obviously very important to the business. It is hard, because research continues to be expensive.
Turner: In terms of finding the right bankers, you guys seem to be hiring a fair bit.
Fleming: You’re always tinkering, to be honest with you. We’ve hired 10 MDs in banking so far this year, which is a lot. Last year we hired 14. Some of that is natural churn. But a lot of this comes down to expanding our capabilities. Our overall market share is 3.25%. Our goals are something close to 4-4.5% in the next two to three years.
Turner: You said that M&A makes up a smaller chunk of the total business than at some of your rivals. Is that a focus for hiring?
Fleming: That is the highest margin product, and the best gauge for the interaction with your client base. We’re talking about CEO, CFO and board level sets of relationships. We’re still reasonably young here in the US at ten to twelve years old. I don’t know what that would make us, a sophomore or something? Those relationships are coming. You know, it just takes time to build credibility. We’ve come a long way. That’s a serious focus of ours. And as you can see from the bankers we’re hiring, we’re making sure that we’re bringing on bankers who have strong C-Suite relationships and are a strong cultural fit with the firm.
Turner: You’ve hired 10 MDs, and we’re in the middle of hiring season right now, so are there more hires on the way?
Fleming: We recruit year round. I mean honestly, even for me, recruiting is year round, because I’m always meeting people. We will continue to add the right people to the platform. Things are still in play and we will keep going.
Turner: What’s your pitch for someone you want to hire?
Fleming: This is going to sound more arrogant than I want it to, but it’s a reasonably small street. If you’re a banker at Bank X, you’re going to know a lot of people here, because bankers have joined our platform from all over the place. We are very easy to check out. They can check out our culture, what we are like. And I think most people find when they come in and meet people, we are set up the way you would expect us to be set up. And we are a lot flatter than most. From a cultural standpoint people find us straightforward and pretty attractive.
Turner: But the pitch has changed, right? The investment bank has a different look to it now versus five years ago.
Fleming: Seven years ago, I would be asked: ‘Are you guys committed to the US?’ You know, banks come in and come out. Well, 20% of our capital is in the US, and 20% of our revenue comes from the US. If you look at the capital markets, which is a subset of the bank, we are a 60% American firm. So we are as American as you can get.
We have a very deliberate and straightforward strategy to grow our investment bank here in the US. That’s a big part of the pitch. People see that. And some of it is opportunity. There is opportunity for leadership here. There is opportunity to grow. You’ve got to be up for the challenge. If you are up for the challenge, and you appreciate the brand, and quality of the people, and the culture of the place, it’s not a bad place to hang your hat.
Turner: You want people who are up for the challenge, but you have a pretty significant balance sheet in the US. It’s not like you’re a boutique.
Fleming: The balance sheet is important. Our strategic plan for the next five years is to deploy a CAGR [compound annual growth rate] on balance sheet at about 4% to 5%. We are definitely going to grow the capital that we deploy here. That is not the case at most firms.
We are very results oriented, and we are pretty transparent with our employees about how we are making money. We have a Monday morning meeting at 7:15 AM every week with some of our core people who walk through the weekly financials. We try to push that down through the organisation. It is a very results oriented and transparent, maybe to a fault.
Turner: A few years ago someone told me that RBC actually stood for revenue before costs, the idea being that RBC was probably a bit more methodical and cautious with investments than some of its peers. Does that ring true?
Fleming: That’s pretty good. Revenue before cost? It could be a little dated. I do think you need to invest in order to grow. I don’t think it is totally inaccurate — we are focused on generating revenue and minimising costs — but particularly in a geography like this, I mean we were building this thing post-financial crisis. You know, it wasn’t a field of dreams, right? We saw an opportunity and invested, and thankfully it worked.
Turner: That’s fair, but from what I can tell you didn’t just get the check book out either.
Fleming: You have to work hard to get the right people, because when you bring the wrong people on it is just way more costly — financially, culturally, time-wise. But to be honest with you, it is more of an 80/20 rule. You can’t get everything right. You make mistakes trying to do things as fast as you can. You can’t attain perfection. But I am always amazed by the lack of diligence that some other firms have when it comes to people. We do our diligence.
Turner: You’ve been here a while, and watched the business change shape. What has that been like?
Fleming: It’s kind of fun actually. Facebook is a good example of a client relationship growing. There was obviously the dramatic IPO, where we were senior co-leads. We happened to have one of the best analysts in the space in Mark Mahaney. Mark is a key part of the tech space and fabric — don’t tell him I said that.
Facebook had a fair amount of their cash with us which made OK money. It’s not like doing a $US20 million M&A trade, but that’s an area where they view us as strong. They like our credit rating and we are very good at global asset management. We developed that relationship with Mark and with banker coverage. So you try to make an appropriate return, but you can’t do that with everyone and you have to be patient. Equally, you’ve got to know when to cut and run, which I think we are reasonably good at doing. But you have to balance that with doing the best for your client.
Turner: The sponsors business seems to be a really big driver for RBC.
Fleming: We’ve got a big sponsor business, it’s 35% of our revenue. It’s highly profitable, but not without risk, obviously. The velocity of capital in the sponsor business is pretty high. We segment our clients pretty carefully, and you go through it by rating. Our ROE [return on equity] on a single client across everything is 16%, that’s pretty good. And that’s 6% or 7% on the loan, so this would tend to be an LBO [leveraged buyout]. We make 6% or 7% per cent off the loan, but we make 6%-9% on investment banking products. Our overall goal is 14% in capital markets, we are at about 12% or 13%, and the bank is at 18%.
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